Pimco’s New ETF Leaves Advisers Cold
(NEWPORT BEACH) Bill Gross says the exchange-traded version of his $250 billion Pimco Total Return Fund (PTTRX) has the potential to become the first hot seller among actively managed ETFs. Investment advisers are giving the fund a cool reception, according to a recent Bloomberg feature.
“We would just stick with the Total Return Fund rather than going to the ETF,” because the ETF won’t have the same use of derivatives to increase returns as the traditional fund, said Brian Pollak, fixed income portfolio manager for New York-based Evercore Wealth Management LLC, which oversees about $3.2 billion. Gross, co-chief investment officer of Pacific Investment Management Co., the Newport Beach, California-based unit of insurer Allianz SE , is the most prominent professional to start an actively managed ETF. The flagship Total Return Fund he runs has generated 8.4 percent average annual returns over the past five years, and Morningstar Inc. (MORN) named Gross a fund manager of the decade in 2010.
Assets in ETFs, which generally are baskets of securities that trade on exchanges like stocks, rose to about $1.1 trillion in January from about $66 billion in 2000, according to the Investment Company Institute, a Washington-based trade group for the mutual-fund industry.Yet actively managed ETFs, which seek to benefit from the skill of a manager selecting investments rather than tracking indexes, haven’t gained significant traction among investors as assets are less than 0.5 percent of the total invested in ETFs, according to ICI data.
Growth Driver
Registered investment advisers are a “growth driver” for the ETF industry, said Tyler Cloherty, senior analyst for Cerulli Associates. RIAs are firms that manage or provide advice on investments and generally charge fees for services, compared with broker-dealers that more commonly charge commissions. About 15 percent of assets under management by advisers were invested in ETFs in 2011, up from about 8 percent in 2009, according to the Boston-based market research firm. Advisers account for about 10 percent of total assets invested in ETFs. Pimco in April filed to start an ETF that Gross will manage and may invest in a similar strategy as his Total Return Fund. The ETF will invest primarily in a diversified portfolio of fixed-income assets, including government bonds and mortgage- backed securities.
Restrictions on Derivatives
Unlike the flagship mutual fund, the Total Return ETF can’t use certain derivatives, such as futures, options and swap agreements, according to documents on the Pimco website. Derivatives are financial instruments used for speculation or to hedge risks, and generally derive their values from an underlying asset. “If you believe Bill Gross and Pimco are diligent and thoughtful about the use of derivatives, then why wouldn’t an investor employ Bill Gross with the ability to use derivatives?” said Alan Zafran, a partner with Los Angeles- based Luminous Capital, which manages about $4.7 billion.
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